CFTC Advisory Committee Recommends Use of Blockchain for Non-Cash Collateral
Commentary by Andrew Lom
The CFTC's Global Markets Advisory Committee ("GMAC") recommended the adoption of distributed ledger technology ("DLT") to address challenges in using non-cash collateral for derivatives transactions. The decision to advance the recommendations to the CFTC was prepared in a report by the GMAC Subcommittee on Digital Asset Markets and was approved without objection.
In the report, the Subcommittee highlighted the operational challenges posed by current processes for transferring non-cash collateral, recommending that DLT could streamline these processes by allowing for peer-to-peer transfers, tokenization of assets and integration with traditional systems. The Subcommittee stated that such advancements would reduce settlement times and eliminate the need for costly intermediaries.
The Subcommittee recommended that the CFTC consider whether existing regulations are sufficient to accommodate DLT without additional rulemaking. GMAC recommended that registrants could integrate DLT by following current requirements around (i) legal enforceability, (ii) segregation and custody of collateral, (iii) credit risk management and (iv) information security. GMAC referred to ongoing efforts, including ISDA's work on tokenized collateral, as critical to developing consistent practices and standards across markets.
Commentary
The GMAC recommendation should help the US catch up with regulatory sandboxes and other projects that are underway in other countries. Many major financial institutions and industry groups have been focused for years on the benefits of DLT and related technologies (not necessarily public permissionless blockchains) for delivering market efficiency, safety and transparency. Having some regulatory clarity and certainty in the US would go a long way toward achieving the promise of these technologies.
It should also be noted that GMAC is non-partisan and represents a wide range of industry participants that could be buyers or sellers in transactions involving DLT-based financial infrastructure.
Related Articles
-
The Federal Reserve Board provided guidance to banking organizations on (i) supervision over "novel activities" and (ii) the process for state member banks to follow before engaging with dollar token or stablecoin activity.
-
House Financial Services Committee Chair Patrick McHenry (R-NC) and House Agriculture Committee Chair Glenn Thompson (R-PA) proposed legislation that would establish a digital asset framework and provide for related joint rulemaking from the CFTC and the SEC.
-
IOSCO offered policy recommendations to "support jurisdictions seeking to establish compliant markets for the trading of crypto or ‘digital’ or ‘virtual’ assets." The recommendations are intended to promote international consistency in regulatory frameworks.